VALVOLINE INC. The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 , as well as the condensed consolidated financial statements and the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q.
BUSINESS OVERVIEW AND PURPOSE
Valvoline Inc. is a global vehicle and engine care company that continuously powers the future of mobility through innovative services and products for electric, hybrid and internal combustion powertrains. Valvoline has consistently led the way innovating and reinventing its services and products for changing technologies and customer needs throughout its 155-year history. Valvoline operates a fast-growing, best-in-class network of service center stores, which are well positioned to serve evolving vehicle maintenance needs with Valvoline's iconic products. In addition to its quick, easy and trusted quick lube oil change services and the legendary Valvoline-branded passenger car motor oils, Valvoline provides a wide array of lubricants, chemicals, fluids, and other complementary products and services, including leading the world's supply of battery fluids to electric vehicle manufacturers, with each solution tailored to help extend vehicle and engine range and efficiency. Valvoline provides vehicle and engine care solutions to a range of customers, including end consumers, OEMs, mass market and automotive parts retailers, small to large installers, vehicle fleets, and distributors, among others. Valvoline operates and franchises more than 1,600 service center locations and is the second and third largest chain inthe United States ("U.S.") andCanada , respectively, by number of stores. With sales in more than 140 countries and territories, Valvoline's solutions are available for every engine and powertrain, including high-mileage and heavy-duty applications, and are offered at more than 80,000 locations worldwide. 19 --------------------------------------------------------------------------------
BUSINESS STRATEGY
Valvoline is focused on the following key business and growth strategies in fiscal 2022:
•Executing the strategic separation of Valvoline's two business segments, Retail Services and Global Products, to create sustainable value for the Company's stakeholders and best position the segments for continued long-term success by allowing Retail Services to continue its growth and focus on leveraging its world class service model and providing Global Products with the opportunity to focus and allocate capital to its own strategic priorities; •Aggressively growing Retail Services through organic service center expansion, opportunistic acquisitions, and franchisee growth, while rapidly diversifying and expanding retail service offerings and capabilities through a quick, easy, and trusted customer experience delivered by hands-on experts; •Accelerating Global Products market share growth through continued development of and investment in key global emerging and high value markets by fully leveraging brand equity and product platforms to drive speed, efficiency, and value across the business and customer interactions, while increasing penetration of Valvoline's full product portfolio; •Expanding capabilities to serve future transport vehicles by continuing to develop relationships with electric vehicle OEMs and leveraging innovation in the delivery of future services and products in direct and adjacent markets; and
•Building a strong foundation enabled by data and technology to make Valvoline easy to do business with.
RECENT DEVELOPMENTS Strategic separation OnOctober 12, 2021 , Valvoline announced its intention to pursue a separation of its two reportable segments, Retail Services and Global Products. Valvoline is making progress and evaluating alternatives to accomplish the separation of these two strong businesses. Consummation of the separation will be subject to final approval by Valvoline's Board, and no timetable has currently been established for completion of the separation. Valvoline's results this quarter highlight the independent strengths of both of its reportable segments, and separation is expected to enable the two businesses to enhance focus on their distinct customer bases, strategies for continued growth, and operational needs.
COVID-19 update
Valvoline has substantially maintained its operations, demonstrating growth and strong results, while managing through the effects of the COVID-19 global pandemic to-date. Valvoline's global offices and locations have established protocols based on continuous monitoring of the circumstances and trend data surrounding the pandemic and following government guidelines to make decisions regarding the safe operation of its offices and locations. Valvoline's return-to-office protocol for its corporate headquarters located inLexington, Kentucky allowed employees that have been vaccinated to voluntarily return to the office with masking requirements lifted inMarch 2022 . Employees are encouraged to reconnect and collaborate on-site in locations and circumstances where protocols support in-person work, while the flexibility and convenience for employees to work remotely has been maintained in many locations. DuringApril 2022 , the Chinese government implemented strict control measures in response to the resurgence of COVID-19, which resulted in a temporary shut-down of Valvoline's local operations. Limited operations were maintained during most ofApril 2022 , and the local blending and packaging facility resumed operations by late April, near its full capacity due to local supply chain constraints as a result of the restrictions. 20 -------------------------------------------------------------------------------- Management is unable to reasonably quantify the impact of COVID-19 on its current year results. The continually evolving COVID-19 pandemic remains uncertain and its future impact on Valvoline will depend on a number of factors, including among others, the duration and severity of the spread of COVID-19, emerging variants, vaccine and booster effectiveness, public acceptance of safety protocols, and government measures, including vaccine and mask mandates, among others. While the Company cannot predict the duration or the scale of the COVID-19 pandemic, or the effect it may continue to have on Valvoline's business, results of operations, or liquidity, management continuously monitors the situation, the sufficiency of its responses, and makes adjustments as needed. For more information, refer to Risk Factors included in Item 1A of Part I in Valvoline's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 .
SECOND FISCAL QUARTER 2022 OVERVIEW
The following were the significant events for the second fiscal quarter of 2022, each of which is discussed more fully in this Quarterly Report on Form 10-Q:
•Valvoline delivered strong top-line results, reflecting share gains from ongoing demand for its products and services, price increases to recover cost inflation, and continued effective operational execution. Net income grew 19% to$81 million and diluted earnings per share grew 22% to$0.45 in the three months endedMarch 31, 2022 compared to the prior year period. •Retail Services sales increased 23% over the prior year period driven by system-wide same-store-sales ("SSS") growth of 13.1% and the addition of 113 net new stores to the system from the prior year. Operating income decreased 4% and adjusted EBITDA was flat over the prior year as the current inflationary environment resulted in higher labor and product costs that impacted profitability. •Global Products sales increased 29% and outpaced volume growth of 9% compared to the prior year quarter. These top-line results highlight the successful price pass-through of raw material cost increases as well as continued strong demand for Valvoline products across key geographies and channels. Operating income and adjusted EBITDA both improved 1% from the prior year as growth in sales was moderated by supply chain challenges and the raw material cost environment. •The Company returned$57 million to its shareholders through payment of a cash dividend of$0.125 per share and the repurchase of 1 million shares of Valvoline common stock during the quarter.
Use of Non-GAAP Measures
To supplement the financial measures prepared in accordance withU.S. GAAP, certain items within this document are presented on an adjusted basis. These non-GAAP measures, presented both on a consolidated and reportable segment basis, have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, the financial statements presented in accordance withU.S. GAAP. The financial results presented in accordance withU.S. GAAP and reconciliations of non-GAAP measures included within this Quarterly Report on Form 10-Q should be carefully evaluated.
The following are the non-GAAP measures management has included and how management defines them:
•EBITDA - defined as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;
•Adjusted EBITDA - defined as EBITDA adjusted for certain unusual, infrequent or
non-operational activity not directly attributable to the underlying business,
which management believes impacts the comparability of operational results
between periods ("key items," as further described below);
•Segment adjusted EBITDA - defined as segment operating income adjusted for depreciation and amortization, in addition to key items impacting comparability;
•Free cash flow - defined as cash flows from operating activities less capital expenditures and certain other adjustments as applicable; and
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--------------------------------------------------------------------------------•Discretionary free cash flow - defined as cash flows from operating activities less maintenance capital expenditures and certain other adjustments as applicable.
These measures are not prepared in accordance withU.S. GAAP and management believes the use of non-GAAP measures on a consolidated and reportable segment basis provides a useful supplemental presentation of Valvoline's operating performance, enables comparison of financial trends and results between periods where certain items may vary independent of business performance, and allows for transparency with respect to key metrics used by management in operating the business and measuring performance. The non-GAAP information used by management may not be comparable to similar measures disclosed by other companies, because of differing methods used in calculating such measures. For a reconciliation of the most comparableU.S. GAAP measures to the non-GAAP measures, refer to the "Results of Operations" and "Financial Position, Liquidity and Capital Resources" sections below. Management believes EBITDA measures provide a meaningful supplemental presentation of Valvoline's operating performance due to the depreciable assets associated with the nature of the Company's operations and interest costs related to Valvoline's capital structure. Adjusted EBITDA measures exclude the impact of key items, which consist of income or expenses associated with certain unusual, infrequent or non-operational activity not directly attributable to the underlying business that management believes impacts the comparability of operational results between periods. Adjusted EBITDA measures enable comparison of financial trends and results between periods where key items may vary independent of business performance. Key items are often related to legacy matters or market-driven events considered by management to be outside the comparable operational performance of the business. Key items may consist of adjustments related to: legacy businesses, including the separation from Valvoline's former parent company and associated impacts of related indemnities; significant acquisitions or divestitures; restructuring-related matters; and other matters that are non-operational or unusual in nature. Key items also include the following: •Net pension and other postretirement plan expense/income - includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global financial markets (in particular, interest rates) and are outside the operational performance of the business and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA includes the costs of benefits provided to employees for current service, including pension and other postretirement service costs. •Changes in the last-in, first-out ("LIFO") inventory reserve - charges or credits recognized in Cost of sales to value certain lubricant inventories at the lower of cost or market using the LIFO method. During inflationary or deflationary pricing environments, the application of LIFO can result in variability of the cost of sales recognized each period as the most recent costs are matched against current sales, while preceding costs are retained in inventories. LIFO adjustments are determined based on published prices, which are difficult to predict and largely dependent on future events. The application of LIFO can impact comparability and enhance the lag period effects between changes in inventory costs and relating pricing adjustments.
Details with respect to the composition of key items recognized during the respective periods presented herein are set forth below in the "EBITDA and Adjusted EBITDA" section of "Results of Operations" that follows.
Management uses free cash flow and discretionary free cash flow as additional
non-GAAP metrics of cash flow generation. By including capital expenditures and
certain other adjustments, as applicable, management is able to provide an
indication of the ongoing cash being generated that is ultimately available for
both debt and equity
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holders as well as other investment opportunities. Free cash flow includes the
impact of capital expenditures, providing a supplemental view of cash
generation. Discretionary free cash flow includes the impact of maintenance
capital expenditures, which are routine uses of cash that are necessary to
maintain the Company's operations and provides a supplemental view of cash flow
generation to maintain operations before discretionary investments in growth.
Free cash flow and discretionary free cash flow have certain limitations,
including that they do not reflect adjustments for certain non-discretionary
cash flows, such as mandatory debt repayments. The amount of mandatory versus
discretionary expenditures can vary significantly between periods.
Key Business Measures
Valvoline tracks its operating performance and manages its business using certain key measures, including system-wide, company-operated and franchised store counts and SSS, and lubricant volumes sold. Management believes these measures are useful to evaluating and understanding Valvoline's operating performance and should be considered as supplements to, not substitutes for, Valvoline's sales and operating income, as determined in accordance withU.S. GAAP. Sales in the Retail Services reportable segment are influenced by the number of service center stores and the business performance of those stores. Stores are considered open upon acquisition or opening for business. Temporary store closings remain in the respective store counts with only permanent store closures reflected in the activity and end of period store counts. SSS is defined as sales byU.S. Retail Services service center stores (company-operated, franchised and the combination of these for system-wide SSS), with new stores including franchised conversions, excluded from the metric until the completion of their first full fiscal year in operation as this period is generally required for new store sales levels to begin to normalize. Differences in SSS are calculated to determine the percentage change between comparative periods. Retail Services sales are limited to sales at company-operated stores, sales of lubricants and other products to independent franchisees and Express Care operators and royalties and other fees from franchised stores. Although Valvoline does not recognize store-level sales from franchised stores as revenue in its Condensed Consolidated Statements of Comprehensive Income, management believes system-wide and franchised SSS comparisons and store counts are useful to assess market position relative to competitors and overall store and segment operating performance.
Management believes lubricant volumes sold in gallons by its consolidated subsidiaries is a useful measure in evaluating and understanding the operating performance of the Global Products segment. Volumes sold in other units of measure, including liters, are converted to gallons utilizing standard conversions.
RESULTS OF OPERATIONS Consolidated review The following summarizes the results of the Company's operations for the period endedMarch 31 : Three months ended March 31 Six months ended March 31 2022 2021 2022 2021 (In millions) Amount % of Sales Amount % of Sales Amount % of Sales Amount % of Sales Sales$ 886 100.0 %$ 701 100.0 %$ 1,744 100.0%$ 1,354 100.0% Gross profit$ 250 28.2 %$ 247 35.2 % $ 494 28.3%$ 475 35.1% Net operating expenses$ 133 15.0 %$ 116 16.5 % $ 256 14.7%$ 220 16.2% Operating income$ 117 13.2 %$ 131 18.7 % $ 238 13.6%$ 255 18.8% Net income $ 81 9.1 %$ 68 9.7 % $ 168 9.6%$ 155 11.4% 23
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Sales
The following provides a reconciliation of the increase in sales from the prior
year:
Year-over-year changes
Three months ended Six months ended
(In millions) March 31, 2022 March 31, 2022
Volume and mix $ 67 $ 171
Price 113 203
Currency exchange (9) (9)
Acquisitions 14 25
Change in sales $ 185 $ 390
The increases in sales for the three and six months ended March 31, 2022
compared to the prior year periods were driven by benefits across both
reportable segments, largely as a result of pricing actions and volume growth,
and to a lesser extent, favorable mix. The Company continues to pass through
cost increases in its pricing and benefit from strong demand for Valvoline's
products and services. Retail Services increased sales were led by system-wide
SSS growth as well as store expansion from unit additions and acquisitions.
Global Products sales increased with volume growth and top-line improvement
across all regions.
The changes to reportable segment sales and the drivers thereof are discussed in further detail in the "Reportable Segment Review" section below.
Gross profit
The table below provides a reconciliation of the increase in gross profit from
the prior year:
Year-over-year changes
Three months ended Six months ended
(In millions) March 31, 2022 March 31, 2022
Volume and mix $ 32 $ 82
Change in LIFO reserve 2 -
Price and cost (30) (63)
Currency exchange (2) (2)
Acquisitions 1 2
Change in gross profit $ 3 $ 19
The increase in gross profit was primarily driven by higher volumes and to a
lesser extent, favorable mix. These benefits across both reportable segments
were partially offset by product and labor inflationary cost pressures, in
addition to supply chain challenges. A reduction in the LIFO charge for the
current quarter compared to the prior year period, as well as unit growth
through acquisitions provided modest benefits to gross profit.
The declines in gross profit margin rates for the current quarter and
year-to-date periods were primarily the result of higher raw material costs,
supply chain challenges, and the dilutive impact from passing through cost
increases. Management continues to closely monitor the raw material cost
environment and make progress in passing through the cost increases that began
in fiscal 2021.
The changes to reportable segment gross profit and the drivers thereof are discussed in further detail in the "Reportable Segment Review" section below.
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--------------------------------------------------------------------------------Net operating expenses
The table below summarizes the components of net operating expenses for the
period ended
Three months ended March 31 Six months ended
2022 2021 2022 2021
(In millions) Amount % of Sales Amount % of Sales Amount % of Sales Amount % of Sales
Selling, general and
administrative expenses $ 137 15.4 % $ 129 18.4 % $ 272 15.6 % $ 246 18.1 %
Legacy and separation-related
expenses 6 0.7 % - - % 9 0.5 % 1 0.1 %
Equity and other income, net (10) (1.1) % (13) (1.9) % (25) (1.4) % (27) (2.0) %
Net operating expenses $ 133 15.0 % $ 116 16.5 % $ 256 14.7 % $ 220 16.2 %
Expected credit losses on receivables due to the disruption of business in
Russia and increased costs associated with information technology investments
and transitions combined for $8 million and $10 million of the year-over-year
increases in selling, general and administrative expenses for the three and six
months ended March 31, 2022 , respectively. Additionally, expenses supporting
growth related to travel, advertising and promotions combined for an $11 million
increase for the year-to-date over the prior year period.
Legacy and separation-related expenses increased during the three and six months
ended March 31, 2022 primarily due to the costs incurred in the current year for
planning the separation of the Retail Services and Global Products segments.
These costs included legal, tax and accounting, and other professional advisory
and consulting fees, which the Company expects will continue to be incurred
during the balance of fiscal 2022 associated with planning for the proposed
separation.
The decrease in Equity and other income, net in the current year periods was primarily driven by lower insurance recoveries in the current year.
Net pension and other postretirement plan income
Net pension and other postretirement plan income for the three and six months endedMarch 31, 2022 decreased$5 million and$9 million , respectively, from the prior year periods. This decline was due to lower expected returns on plan assets as a result of the shift in asset allocation of theU.S. qualified plans toward a higher mix of fixed income securities, in addition to a reduction in the amortization of prior service credits into income from certain other postretirement plan amendments that ceased amortization beginning in fiscal 2022.
Net interest and other financing expenses
Net interest and other financing expenses decreased$37 million and$40 million during the three and six months endedMarch 31, 2022 , respectively, compared to the prior year periods. These decreases are primarily related to debt extinguishment costs, including the redemption premium and the write-off of unamortized debt issuance costs, due to the prior year redemption of the 4.375% senior unsecured notes due 2025 with an aggregate principal amount of$800 million . 25 --------------------------------------------------------------------------------
Income tax expense
The following table summarizes income tax expense and the effective tax rate:
Three months ended March 31 Six months ended March 31
(In millions) 2022 2021 2022 2021
Income tax expense $ 27 $ 22 $ 53 $ 52
Effective tax rate percentage 25.0 % 24.4 % 24.0 % 25.1 %
The increase in income tax expense for the three months ended March 31, 2022 was
principally driven by higher pre-tax earnings, in addition to an increased
effective tax rate due to unfavorable discrete activity. Income tax expense
remained relatively flat with higher pre-tax earnings in the six months ended
March 31, 2022 , resulting in a lower effective tax rate that was driven by
discrete benefits in the current year-to-date period.
EBITDA and Adjusted EBITDA
The following table reconciles net income to EBITDA and Adjusted EBITDA:
Three months ended Six months ended
March 31 March 31
(In millions) 2022 2021 2022 2021
Net income $ 81 $ 68 $ 168 $ 155
Income tax expense 27 22 53 52
Net interest and other financing expenses 18 55 35 75
Depreciation and amortization 25 23 50 44
EBITDA 151 168 306 326
Net pension and other postretirement plan
income (a) (9) (14) (18) (27)
Legacy and separation-related expenses 6 - 9 1
LIFO charge 3 5 9 9
Business interruption losses (recoveries) 5 (2) 5 (3)
Information technology transition costs 2 - 3 -
Adjusted EBITDA $ 158 $ 157 $ 314 $ 306
(a)Net pension and other postretirement plan income includes remeasurement gains
and losses, when applicable, and recurring non-service pension and other
postretirement net periodic income, which consists of interest cost, expected
return on plan assets and amortization of prior service credits. Refer to Note 7
in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I
in this Quarterly Report on Form 10-Q for further details.
Adjusted EBITDA improved slightly for the three months ended March 31, 2022 and
increased $8 million for the six months ended March 31, 2022 compared to the
prior year periods. These improvements were driven by strong top-line expansion
across both reportable segments, which was partially offset by increased costs
due to inflationary pressures and supply chain challenges, in addition to
increased operating expenses to support top-line growth.
Reportable segment review
The Company manages its business through the following two reportable segments:
•Retail Services - services the passenger car and light truck quick lube market inthe United States andCanada with a broad array of preventive maintenance services and capabilities performed through Valvoline's retail network of company-operated and independent franchised service center stores, in addition to independent Express Care stores that service vehicles with Valvoline products. 26 -------------------------------------------------------------------------------- •Global Products - sells engine and automotive preventive maintenance products in more than 140 countries to retailers, installers, and commercial customers, including OEMs, to service light- and heavy-duty vehicles and equipment. These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in allocating resources and evaluating performance of the business. Adjusted EBITDA is the primary measure used in making these operating decisions, which Valvoline defines as segment operating income adjusted for depreciation and amortization and certain key items impacting comparability.
Costs to support corporate functions and certain non-operational and corporate activity that is not directly attributable to a particular segment are not included in the segment operating results regularly utilized by the chief operating decision maker. This activity is separately delineated within Corporate to reconcile to consolidated results.
Results of Valvoline's reportable segments are presented based on how operations are managed internally, including how the results are reviewed by the chief operating decision maker. The structure and practices are specific to Valvoline; therefore, the financial results of its reportable segments are not necessarily comparable with similar information for other comparable companies.
Retail Services
Management believes the number of company-operated and franchised service center
stores as provided in the following tables is useful to assess the operating
performance of the Retail Services reportable segment.
System-wide stores (a)
Second Quarter
2022 First Quarter 2022 Fourth Quarter 2021 Third Quarter 2021 Second Quarter 2021
Beginning of period 1,635 1,594 1,569 1,548 1,533
Opened 19 32 21 17 13
Acquired 9 12 7 5 3
Closed (2) (3) (3) (1) (1)
End of period 1,661 1,635 1,594 1,569 1,548
Number of stores at end of period
Second Quarter
2022 First Quarter 2022 Fourth Quarter 2021 Third Quarter 2021 Second Quarter 2021
Company-operated 757 738 719 698 673
Franchised 904 897 875 871 875
(a)System-wide store count includes franchised service center stores. Valvoline
franchises are independent legal entities, and Valvoline does not consolidate
the results of operations of its franchisees.
The year over year increase of 113 net system-wide stores was the result of 80
net openings and 33 acquired stores. New store openings was driven by 29 net
company-operated service center store openings and 51 net new franchisee store
openings from expansion in key markets. In addition, 22 net stores converted
within the system from franchise to company-operated.
27
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The following summarizes the results of the Retail Services reportable segment:
Three months ended Six months ended
March 31 March 31
(In millions) 2022 2021 Increase (decrease) 2022 2021 Increase (decrease)
Financial information
Retail Services segment sales $ 350 $ 285 23 % $ 696 $ 539 29 %
Operating income (b) $ 77 $ 80 (4) % $ 158 $ 136 16 %
Key items - - - -
Depreciation and amortization 18 15 20 % 35 29 21 %
Adjusted EBITDA $ 95 $ 95 - % $ 193 $ 165 17 %
Operating margin (c) 22.0 % 28.1 % (610) bps 22.7 % 25.2 % (250) bps
Adjusted EBITDA margin (c) 27.1 % 33.3 % (620) bps 27.7 % 30.6 % (290) bps
Three months ended Six months ended
March 31 March 31
2022 2021 2022 2021
Same-store sales growth
Company-operated (c) 10.0 % 19.8 % 15.7 % 12.8 %
Franchised (a) (d) 15.5 % 20.4 % 20.9 % 13.1 %
System-wide (a) (d) 13.1 % 20.2 % 18.6 % 13.0 %
(a)Measure includes Valvoline franchisees, which are independent legal entities.
Valvoline does not consolidate the results of operations of its franchisees.
(b)Valvoline does not generally allocate activity below operating income to its
operating segments; therefore, the table above reconciles operating income to
adjusted EBITDA.
(c)Operating margin is calculated as operating income divided by sales, and
adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales.
(d)Valvoline determines SSS growth as sales by U.S. Retail Services service
center stores, with new stores, including franchise conversions, excluded from
the metric until the completion of their first full fiscal year in operation.
Retail Services sales increased 23% and 29% for the three months and six months
ended March 31, 2022 , respectively, compared to the prior year periods.
System-wide SSS growth was led by higher transactions due to share gains, in
addition to increased average ticket from pricing actions and premiumization.
The addition of 113 net new stores to the system through acquisitions and new
service center store openings also contributed to sales growth from the prior
year.
Operating income decreased 4% and adjusted EBITDA was flat for the three months
ended March 31, 2022 compared to the prior year period. Deleverage due to wage
inflation and labor inefficiencies, as well as supply chain constraints that
resulted in higher product costs, drove lower operating profits and flat
adjusted EBITDA. Valvoline is currently executing incremental pricing actions to
address these inflationary pressures and is expected to improve profitability in
the second half of the fiscal year. Operating income and adjusted EBITDA
increased 16% and 17%, respectively, for the six months ended March 31, 2022
compared to the prior period and was driven by strong top-line performance and
the addition of new stores.
28
--------------------------------------------------------------------------------Global Products
The following table summarizes the results of the Global Products reportable
segment:
Three months ended Six months ended
March 31 March 31
(In millions) 2022 2021 Increase (decrease) 2022 2021 Increase (decrease)
Financial information
Sales by geographic region
North America (a) $ 330 $ 242 36 % $ 634 $ 477 33 %
Europe , Middle East and
Africa ("EMEA") 67 54 24 % 134 105 28 %
Asia Pacific 98 88 11 % 202 171 18 %
Latin America (a) 41 32 28 % 78 62 26 %
Global Products segment
sales $ 536 $ 416 29 % $ 1048 $ 815 29 %
Operating income (b) $ 74 $ 73 1 % $ 144 $ 161 (11) %
Key items - - - -
Depreciation and
amortization 7 7 - % 14 13 8 %
Adjusted EBITDA $ 81 $ 80 1 % $ 158 $ 174 (9) %
Operating margin (c) 13.8 % 17.5 % (370) bps 13.7 % 19.8 % (610) bps
Adjusted EBITDA margin (c) 15.1 % 19.2 % (410) bps 15.1 % 21.3 % (620) bps
Volume information
Lubricant sales (gallons) 43.3 39.9 9 % 86.4 77.9 11 %
(a) Valvoline includes
is included within the
operating segments; therefore, the table above reconciles operating income to
adjusted EBITDA. (c) Operating margin is calculated as operating income divided by sales, and adjusted
EBITDA margin is calculated as adjusted EBITDA divided by sales.
Global Products sales increased 29% for both the three and six months endedMarch 31, 2022 over the prior year periods due to growth across all regions and channels. Sales growth outpaced volumes for both the three and six months endedMarch 31, 2022 attributable to price pass-through of raw material cost increases. Volumes grew 9% and 11% for the three and six months endedMarch 31, 2022 , respectively, over the prior year periods, as a result of improved retail channel performance due to increased distribution and continued recovery in the installer channel from the impacts of COVID-19. Additionally, international volume growth continues to be strong as the Company focuses on building the brand and channels globally. Operating income and adjusted EBITDA both improved 1% during the three months endedMarch 31, 2022 compared to the prior year. Operating income and adjusted EBITDA decreased 11% and 9%, respectively, during the six months endedMarch 31 2022 compared to the prior year period. For the three months endedMarch 31, 2022 , top-line growth was largely offset by increased costs due to the inflationary raw material cost environment and supply chain challenges, while for the six months endedMarch 31, 2022 , these increased costs more than offset by top-line growth. 29 --------------------------------------------------------------------------------
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company closely manages its liquidity and capital resources. Valvoline's liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, acquisitions, share repurchases, and dividend payments are components of the Company's cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities that support Valvoline's business and growth strategies and returning capital to shareholders, while funding ongoing operations.
Cash flows
Cash flows as reflected in the Condensed Consolidated Statements of Cash Flows
are summarized as follows for the six months ended
(In millions) 2022 2021 Cash, cash equivalents and restricted cash - beginning of period$ 231 $ 761 Cash provided by (used in): Operating activities 96 190 Investing activities (84) (276) Financing activities (124) (431)
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash
1 4
Decrease increase in cash, cash equivalents and restricted cash
(111) (513)
Cash, cash equivalents and restricted cash - end of period
Operating activities The decrease in cash flows provided by operating activities of$94 million from the prior year was primarily due to the unfavorable increase in net working capital, largely attributed to growth in accounts receivable from increased sales compared to the prior period. In the current period, net working capital (current assets, excluding cash and cash equivalents, minus current liabilities, excluding long-term debt due within one year) increased$105 million compared to a$40 million increase in the prior year period.
Investing activities
The decrease in cash flows used in investing activities of$192 million was primarily due to lower current year acquisition activity of$200 million and less current year additions to property, plant, and equipment of$7 million , which was partially offset by repayments of franchisee COVID relief loans that were$7 million higher in the prior year.
Financing activities
The decrease in cash flows used in financing activities of$307 million from the prior year was primarily due to net repayments on borrowings that were$279 million less and lower share repurchases of$34 million . The reduction in uses of cash for borrowings was largely due to prior year activity that did not recur to complete the issuance of the 3.625% 2031 Notes with an aggregate principal of$535 million and use the net proceeds, together with cash and cash equivalents on hand, to redeem the 4.375% senior unsecured notes due 2025 with an aggregate principal 30 --------------------------------------------------------------------------------
amount of
Free cash flow
The following sets forth free cash flow and discretionary free cash flow and
reconciles cash flows from operating activities to both measures. These free
cash flow measures have certain limitations, including that they do not reflect
adjustments for certain non-discretionary cash flows, such as mandatory debt
repayments. Refer to the "Use of Non-GAAP Measures" section included above in
this Item 2 for additional information regarding these non-GAAP measures.
Six months ended
March 31
(In millions) 2022 2021
Cash flows provided by operating activities $ 96 $ 190
Less: Maintenance capital expenditures (16) (15)
Discretionary free cash flow 80 175
Less: Growth capital expenditures (51) (59)
Free cash flow $ 29 $ 116
The decrease in free cash flow over the prior year was driven by lower cash
flows provided by operating activities and lower growth capital expenditures, as
maintenance capital expenditures were relatively flat. Valvoline updated its
fiscal 2022 forecasted free cash flow generation to $260 million to $280
million , which excludes cash outflows that cannot currently be reasonably
estimated related to the proposed separation of Retail Services and Global
Products.
Debt
Inclusive of the interest rate swap agreements, approximately 87% of Valvoline's outstanding borrowings atMarch 31, 2022 had fixed interest rates, with the remainder bearing variable rates. Valvoline was in compliance with all covenants of its debt obligations as ofMarch 31, 2022 and had a combined total of$587 million of remaining borrowing capacity under its Revolver and Trade Receivables Facility. Credit facilities in place inChina had approximately$40 million of combined borrowing capacity remaining,$36 million under theChina Working Capital Facilities and$4 million under the China Construction Facility. Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for additional details regarding the Company's debt instruments.
Dividend payments and share repurchases
During the six months endedMarch 31, 2022 , the Company paid cash dividends of$0.250 per common share for$45 million and repurchased nearly 2.0 million shares of its common stock for$66 million pursuant to theMay 2021 Board authorization to repurchase up to$300 million of common stock throughSeptember 30, 2024 (the "2021 Share Repurchase Authorization"). OnApril 21, 2022 , the Board declared a quarterly cash dividend of$0.125 per share of Valvoline common stock. The dividend is payable onJune 15, 2022 to shareholders of record onMay 31, 2022 . Additionally, the Company repurchased shares of Valvoline common stock for$12 million duringApril 2022 , leaving the Company with$195 million in aggregate share repurchase authority remaining under the 2021 Share Repurchase Authorization as ofMay 1, 2022 . Future declarations of quarterly dividends are subject to approval by the Board and may be adjusted as business needs or market conditions change, while the timing and amount of any future share repurchases will be based on the level of Valvoline's liquidity, general business and market conditions and other factors, including alternative investment opportunities. 31 --------------------------------------------------------------------------------
Summary
As ofMarch 31, 2022 , cash and cash equivalents totaled$118 million , total debt was$1.7 billion , and total remaining borrowing capacity under the Company's Revolver and Trade Receivables Facility was$587 million . Valvoline's ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in the industry, and is subject to the business and other risk factors described in Item 1A of Part I of the Annual Report on Form 10-K for the year endedSeptember 30, 2021 . If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facilities, Valvoline may be required to seek additional financing alternatives.
Management believes that the Company has sufficient liquidity based on its current cash and cash equivalents position, cash generated from business operations, and existing financing to meet its required pension and other postretirement plan contributions, debt servicing obligations, tax-related and other material cash and operating requirements for the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion and analysis of recently issued accounting pronouncements and the impacts on Valvoline, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES
The Company's critical accounting estimates are discussed in detail in Item 7 of Part II in Valvoline's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . Management reassessed the critical accounting estimates as disclosed in the Annual Report on Form 10-K and determined there were no changes in the six months endedMarch 31, 2022 .
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